Silver’s Shine Is Returning

The metal just needs a catalyst to push it through the ceiling

Silver (NYSE:SLV) prices have taken investors on nothing less than a rollercoaster ride — most of it bullish — over the past year-and-a-half. While that volatility seems to be getting reined in now, it doesn’t mean silver is dead money. Indeed, the last couple of months might be the relative calm before the next storm.

The question is: Which direction are the brewing storm winds blowing?

The Technical Look

Click to Enlarge To give credit where it’s due, silver prices impressively turned the sinking ship around at the beginning of the quarter/year. The commodity’s prices were falling rather briskly in November and December, giving back 25.7% of its value all the way through Dec. 29.

A funny thing happened Dec. 29, though — the $26.11 (per ounce) level became a floor and a springboard again, as it was after the late September plunge. By the end of February, silver had rallied 43% and crossed back above all of its key moving averages in the process.

It’s just too bad it didn’t last. Since then, silver has fallen by 5% again, moved back under all of those key moving averages, and is right where it was back in October.

Point being, silver might be making a lot of noise, but it’s not actually getting any traction. Traders looking for any technical clues as to its next major move are hard pressed to find any.

In retrospect, we can see the boundaries are most likely part of a set of Fibonacci retracement lines established by last April’s peak price around $49.80 and the more recent floor around $26.11. The run-up in January and February retraced right at 50% of that span before petering out. And the 38.2% retracement level has been pivotal in the meantime, too, particularly in November. Until and unless the upper ceiling at $37.96 or floor at $26.11 is snapped, silver might not be worth worrying about.

So now we have a new question: What are the underlying pressures that could yank silver out of this rut?

The Fundamental Look

Silver is a tricky metal to dabble in. Sometimes it moves in tandem with gold, but doesn’t necessarily move in gold’s direction for the same reason gold moves. That’s not a bad thing, but it’s an idea traders need to absorb simply because it can matter.

That’s the way Deutsche Bank sees it, anyway. The firm’s forecasters expect silver to outperform gold this year (though both are expected to move higher), thanks to ongoing strength from U.S. equity markets and an economy that continues to firm up.

Makes sense. Gold is a speculator’s play, mostly as a defense against inflation and a currency collapse, and it’s also needed in big quantities by jewelry-makers. It plays a very small role for industry. Silver, on the other hand, is primarily needed for industrial and electronics applications. As such, its demand is a little more consistent.

In fact, it’s so consistent that Deutsche Bank has established a price target of $34 per ounce for the end of the current quarter, and a price target of $40 for the end of the year. For reference, silver last traded at $32.99; reaching those targets won’t be a stretch.

The demand trends certainly are pointing in a bullish direction. In 2011, despite skyrocketing prices, purchases and consumption of silver reached record levels. The Silver Institute says this is all part of a bigger trend for silver, forecasting that silver consumption is going to be 36% greater in 2015 than it was in 2010.

You can thank China for a big chunk of that growing need. Although the country waved a red flag of economic slowing in February — part of the reason for silver hitting a wall when it did — things are now not as dire as first presumed. That, paired with the reality that even silver is starting to attract speculative investment, implies silver has better days ahead.

The Bottom Line

While the growing need and speculative demand for silver won’t inherently mean the price will move higher, they won’t make silver move lower, either.

Simply put, fueled by both technical and fundamental support, there’s not a great deal of downside with silver for Q2 and beyond. There’s at least a little upside, though — and perhaps a lot. Now all we need is a catalyst to unlock that potential upside.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.